The effective combined tax rate in a firm is 40%. An outlay of $2 million for certain new assets is under consideration. Over the next 8 years, these assets will be responsible for annual receipts of $600,000 and annual disbursements (other than for income taxes) of $250,000. After this time, they will be used only for stand-by purposes with no future excess of receipts over disbursements.

a) What is the prospective rate of return before income taxes?

b) What is the prospective rate of return after taxes if straight-line depreciation can be used to write off these assets for tax purposes in 8 years?

c) What is the prospective rate of return after taxes if it is assumed that the assets must be written off for tax purposes over the next 20 years, using straight line depreciation?

Answer rating: 100% (QA)

a Investment in asset 2000000 Annual receipts 600000 Annual disbursements 250000 Annual depreciat... View the full answer